Michael Hartnett, Bank of America's chief strategist known as one of Wall Street's most accurate analysts, stated on Friday that planned mega-IPOs like those of SpaceX and OpenAI risk pushing the weight of technology stocks in benchmark indices to concentration levels seen during past market bubbles. Currently, SpaceX, under the leadership of the world's richest person Elon Musk, has outlined the most ambitious IPO plan in history, while ChatGPT developer OpenAI aims to go public before its rival Anthropic.
These massive stock issuance plans are set to further fuel market optimism toward technology and artificial intelligence, a sentiment that has already driven the most concentrated (and narrowest) bull market in decades. "Sharp price movements, blind retail frenzy, persistently low volatility... it all feels very bubble-like," Hartnett remarked in a report. "If you add the mega-IPOs of AI giants to the mix, market concentration could easily surpass the bubble levels of the 'Roaring Twenties,' the 'Nifty Fifty' of the 1970s, '80s Japan, and the '90s TMT boom."
Currently, the technology sector accounts for over 44% of the S&P 500 index. This further concentration could pose additional challenges for asset managers, who, due to risk control constraints, may be unable to fully replicate these weightings in their portfolios. Moreover, stock indices heavily skewed toward the soaring tech sector risk masking underlying weaknesses in sectors more directly tied to the economy, such as consumer and financial stocks.
When reviewing major historical IPOs, Hartnett noted that the debuts of giants like Saudi Aramco and Meta ultimately proved insignificant to the broader market's overall trajectory. However, following IPOs with "market top" signals, such as those of Visa and AIA Group, the market often underperformed in the subsequent 9 to 12 months.
**Surging Bond Yields Signal the End of Boom and Bubble**
Hartnett views the current surge in bond yields as a hallmark of the end of a boom and bubble period. Last year, he accurately predicted that international equities would outperform U.S. stocks, and his bullish stance on commodities has also paid off. This time, he points to two ETFs from State Street as "barometers" for observing how bond yields influence the stock market.
Hartnett explained that if the biotech ETF, typically viewed as a speculative asset, falls to $120, it indicates that bond yields are still rising sharply. Conversely, if the retail-tracking ETF rises to $85, it suggests that bond-related shocks have been postponed.
Hartnett stated that current market bullish sentiment is nearing extreme levels, triggering sell signals for equities. A fund manager survey released by Bank of America earlier this week showed that investors increased their allocations to stocks this month by a record margin, prompting Hartnett to warn again that the stock market appears poised for a pullback.
"In terms of positioning and earnings, bullish market sentiment has reached a consensus peak, coupled with the beginning of a rebound in yields, suggesting profit-taking could occur here," he said in his latest report. However, he added, "No one will cut equity longs before a historic IPO, and real policy tightening will come once CPI hits 4-5% in the coming months."
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